We discuss some concepts related to charitable gifts and estate administration in this piece. This includes charitable donation tax credits and designated donations and how these concepts changed in 2015 and 2016.
Charitable donation tax credits
When a living person makes a charitable donation, they receive a donation tax credit. This also applies to people who've passed away and made donations to charitable organizations at their death.
The tax credit is also available if someone donates property, such as shares in a public corporation or real estate. You may also see donations of antiques or collector's items to museums or even old cabinets to places such as Habitat for Humanity. Donated gifts are generally valued at fair market value.
A charitable donation isn't only available to charities. It qualifies any group that's a "qualifying donee", which includes organizations such as an amateur athletic association or municipality
Whether monetary or a gift of property, each donation generally results in a percentage of the donation's fair market value resulting in a tax credit. The exact value of the tax credit depends on various factors.
It's important to note that charitable donations result in a tax credit and not a tax deduction. Tax credits allow someone to subtract dollar for dollar from their tax liability, while a tax deduction means a reduction in a person's income that's liable to taxation.
If a client has significant charitable donations and tax liabilities, it may be beneficial to work with a tax expert to minimize these liabilities.
Many accounts or estate planning instruments let you designate someone as a beneficiary. This may allow the amount of money related to the designation to go to the beneficiary tax and probate-free. A designated donation is when the designated beneficiary is a qualifying donee.
You can designate a beneficiary on instruments such as a registered retirement savings plan (RRSP), tax-free savings account (TFSA), or a life insurance policy.
Charitable estate administration rules before and after 2015
New tax legislation changed how certain gifts by will, beneficiary designation, designated gifts, and estate donations function. Thus, death before January 1, 2016, and deaths after December 31, 2015, may face different legal ramifications.
Death before January 1, 2016
For pre-January 1, 2016 deaths and gifts by will, the gift is deemed to be made immediately before the individual's death. The donation tax credit is claimable against the donor's income taxes on their year of death or the year immediately preceding it. The value of the gift is the fair market value on the date of death.
Suppose a gift is made by the estate (i.e., the estate administrator in its power decides to make this charitable gift). In that case, the donation tax credits are claimable against the estate's income taxes or by the estate in any of its following five taxation years.
Deaths after December 31, 2015
For death occurring after December 31, 2015, the estate's gifts are deemed to be made when the donor transfers the property to the qualifying donee. So, even donations made by a will or designation are no longer deemed to be made immediately before death. The value of the gifts is also at the fair market value when the estate transfers the property to the qualifying donee.
The post-December 31, 2015 rules also added the Graduated Rate Estate ("GRE") gifts. A GRE is an estate that
- Results from the death of the individual;
- Qualifies as a testamentary trust;
- Exists for no more than 36 months from the death of the individual;
- Provides a social insurance number to the Canada Revenue Agency on the deceased's estate tax returns; and,
- Designates the estate or trust as a GRE on its first estate tax return.
As a result, the GRE is eligible to make GRE gifts as long as it's made within 36 months of the individual's death and is property acquired by the estate as a result of death. A GRE gift ultimately allows the estate to allocate the donation tax benefits to
- The taxation year that the GRE made the donation
- An earlier year of the GRE
- The last two taxation years of the deceased individual
Ultimately, the change in 2015/2016 provided estate planners and administrators with more flexibility in minimizing an estate's tax liability.
This article provided a very brief overview of estate administration and charitable gifts. This is an essential area of law for any estate planning or administration professional, and it's vital to learn its ins and outs.
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